U.K. to learn if it has entered "triple-dip" recession

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Published April 25, 2013

| Reuters

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LONDON – Britain finds out on Thursday if its stagnant economy has slipped back into recession, a week after the International Monetary Fund urged finance minister George Osborne to consider scaling back his austerity program.

Economists estimate that Britain's $2.4 trillion economy eked out growth of 0.1 percent in the first three months to March, according to a Reuters poll.

That would avoid a second quarter of contraction - the definition of a recession - after it shrank by 0.3 percent in the last three months of 2012.

But with a margin this slim, the Office for National Statistics could easily report a negative number in its initial estimate of gross domestic product data at 0430 EDT, tipping the country into its third recession in under five years.

A "triple-dip recession" would come at an awkward time for Osborne, just days after ratings agency Fitch stripped Britain of its top-notch credit rating and plans to help homeowners in last month's budget came under fire from legislators.

Osborne has stuck to his commitment to eliminate Britain's underlying budget deficit in five years, despite consistently disappointing economic growth figures that have led to mounting calls for him to relent.

The IMF - previously supportive of Britain's approach to deficit reduction - thinks some cuts may need to be deferred given the weakness in demand. An IMF mission visits Britain next month for an assessment of the country's economy that could include recommendations for a change of course.

While the difference between growth or contraction of 0.1 percent is statistically small, analysts warn of a broader problem of stagnation and a risk of a Japanese-style 'lost decade' of near-zero growth.

"The chance that you see a small contraction ... is pretty big," said Berenberg Bank economist Rob Wood, who forecasts zero growth on the quarter. "But I don't think this would change the underlying picture of an economy that has gone nowhere for 18 months and is struggling with some big headwinds," he added.

Britain has been much slower to recover from the financial crisis than most other big economies. At the end of 2012 its GDP was still nearly 3 percent smaller than before the crisis.

Weak demand from a recession-hit euro zone, a drag from the government's deficit-reduction measures and high inflation eating into meager wage rises are all to blame.

Furthermore, the global economy is weakening and there are signs of slowing growth in the United States and China.

Adding to the pressure on Osborne, influential academic research that helped underpin his case for the need for rapid deficit reduction has recently been challenged.

He has announced plans for mortgage guarantees and shared equity loans for homebuyers to jump start the housing market, but members of parliament's cross party Treasury Committee said on Saturday the proposals were vague, had unclear costs and might not succeed in increasing the supply of housing.

In another effort to boost the economy, the finance ministry and Bank of England expanded a scheme on Wednesday which aims to boost bank lending.

The performance of the economy in the first quarter hinges largely on whether Britain's dominant services sector - which had a strong January - was hit hard by rare March snow. Industrial output is expected to have been broadly flat, while the small construction sector is likely to have contracted.